Added to Watch List: Torstar (TS.B); Dropping AbitibiBowater

One of the worst industries for investors over the last 5 years has been the newspaper industry. If you ever want to know what seems like a value trap, this industry may be it. Just look at the chart below of some of the leading US newspapers, along with the Canadian TorStar (WPO=Washington Post; NYT=New York Times; GCI=Gannett; TS.B=Torstar):

(source: bigcharts.marketwatch.com)

Needless to say, it has been disastrous for anyone that bought any of the newspaper companies back in 2004. But, rightly or wrongly, disastrous situations are what attracts me so it's time to consider investing in them.

I have indirectly tracked newspapers for a few years. Initially because I was looking at newsprint/forestry stocks, such as Abitibi, whose main customers were the newspapers. Later on, I started looking into them because several value investors took positions in them (or at least were talking about them.) Finally, I have decided to take a deeper look and possibly take a position based on the steep price declines in the last year or so. Some of these are probably hitting the point where normalized P/E ratios are close to or below 10; dividend yields are 5%+ (most plan to maintain their dividends); and recession sentiments are being priced into the stocks.

An industry such as oil&gas is highly popular these days and what used to be cyclical for the last hundread years is thought to be high growth these days. Consensus view holds that the energy complex is in a long-term secular bull market. Well, if you have contrarian tendencies and want to find the opposite, newspapers fit the bill. Most analysts have said that the newspaper industry has entered a long-term secular bear market. Analyst prediction skills notwithstanding, the market seems to agree with that thesis. But value investors are a weird bunch and often take positions against the consensus. Some of the prominent investors that have taken favourable positions in newspapers include Phil Falcone (Media General, New York Times) and Francis Chou (Torstar).


I've looked at a few and have decided to concentrate on Torstar, a Canadian newspaper company that generates most of its revenue from publishing newspapers and books. I decided to go with Torstar because:

1. I understand it slightly better: hometown paper... somewhat familiar with their other Canadian properties, websites, etc...
   
2. Has a high 5% dividend yield: company doesn't plan to cut dividends this year but you just never know...
   
3. Trades at a favourable price to book value: I have to double-check the numbers but it seems to trade just slightly above book value, whereas Washington Post, New York Times, and a few others, trade a higher book multiples. However, do note that the media mix can be different, and some brands such as New York Times has much higher value.
   
4. Reasonable debt: Again, need to double-check the numbers but its debt/equity ratio is a reasonable 0.7. The great Walter Schloss' main strategy of avoiding debt should be kept in mind--this is especially true for distressed firms with potentially declining sales.
   
5. ROE around 10%+: Nothing spectacular but as long as these media companies have a ROE of 10%+, it's all good...
   

There is one big downside to Torstar and many other newspaper companies. Most of these companies have dual-class share structures, with insiders or family members of the founders generally controlling the voting without having similar economic/ownership interest. This is a huge negative! I have historically avoided companies like this but am still looking at this company for several reasons. First of all, the share price erosion has been so bad that even the family trust (or whoever that owns shares) will get concerned about massive losses. Secondly, many of these organizations are changing their culture and endorsing outside views. Even if they don't give up on the voting structure, they are letting public shareholders and activists get seats on the board of directors and/or influencing the business strategy.

Torstar
Symbol: TS.B (dual-class share structure; vote controlled by closely-held A shares)
Industry: print media (Canada)
Current Stock Price: $12.13
Market Capitalization: C$835 million
P/E: 11.6/8.9 (trailing/forward) (I would not trust the forward numbers)
P/Book: 1.1 (need to check)
ROE: 11.3%
Debt/Equity: 0.7 (need to confirm)

Given the overlap between the newsprint producers and newspapers, I'm going to drop AbitibiBowater from my watch list. The distressed forestry stocks provide far greater upside but the newspapers have better downside protection.